BOOK REVIEW

Free Trade Under Fire
by
Douglas A. Irwin

FUTURECASTS online magazine
www.futurecasts.com
Vol. 4, No. 9, 9/1/02.

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Characteristics of modern globalization:

 

 

 

 

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  A carefully researched, soundly analyzed defense of free trade - of globalization - and the U.S. role in reducing trade barriers is provided by Douglas A. Irwin in "Free Trade Under Fire." He demonstrates convincingly the economic benefits of free trade, and provides a detailed critique of the objections raised in behalf of protectionist and anti trade ideological causes. In addition, he concludes:

  "For nearly three quarters of a century, the United States has nurtured a rules-based world trading system centered on the principle of nondiscrimination and the goal of gradually reducing trade barriers. --- The choices that the United States makes in its own trade policy have ramifications far beyond America's shores and have implications well beyond economics."

Protectionist policies will directly harm employment in other domestic industries by raising their production costs, in addition to forcing consumers to pay a higher price for the products they buy.

  To provide a true picture of U.S. participation in international trade, Irwin does not rely on GDP figures, since these include such expanding non-traded or lightly traded sectors as government and many private services. A more accurate picture is provided by the "merchandise production" figures.

  "[A] close analysis of the merchandise trade figures indicates that trade is substantially more important now than in the recent past for those sectors engaged in trade."

  Merchandise exports rose from about 15% of merchandise production in 1970 to almost 40% in 1999. Because of peculiarities in the statistical data, Irwin points out that this does not mean that 40% of merchandise production was actually exported - but it does demonstrate that the proportion of merchandise production exported considerably more that doubled in the three decades.
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  Imports, too, have surged, "especially for perishable products, which only recently have become traded internationally." However, by far the biggest increase in both exports and imports has been in machinery and transportation equipment - not in finished goods, "but rather in intermediate components and parts."

  "Over half of all imports are either intermediate components or raw materials. These imports are sold as inputs to domestic businesses rather than as goods consumed directly by households."

  This was not the case before 1980. Thus, "protectionist policies will directly harm employment in other domestic industries by raising their production costs, in addition to forcing consumers to pay a higher price for the products they buy."
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  Nevertheless, because of the vast increase in non traded services as a proportion of the U.S. economy, "only about 17% of American workers, those employed in agriculture, mining and manufacturing, are directly exposed to international competition today." In 1960, the figure was 40%.
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  There are services traded internationally - such as shipping, tourism, military transfers, royalties and fees. The most rapidly expanding are education, finance, insurance, telecommunications, business services, technical services and professional services. Recently, exported services equaled about 40% as much as the value of merchandise exports - and are increasing rapidly.
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  Today, exports and imports together equal about 25% of GDP.
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  Growing levels of direct foreign investment, however, increasingly confuse these figures. The U.S. owns growing interests in foreign corporations that export to the U.S., and foreigners own growing interests in U.S. domestic corporations.
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  In the two decades before 1998, foreign owned affiliates increased their share of gross product from domestic industry from 2.3% to 6.3%. In 1998, U.S. companies exported $933 billion worth of goods, but sold $2,810 billion to foreign customers through foreign affiliates. For imports from foreign companies into the U.S., the figures were $1,100 billion and $1,710 billion. This trade thus indicated a $363 billion advantage for the U.S.
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Considerable skepticism is justified when evaluating the official trade figures.

 Moreover, there is "vertical specialization," as components and intermediate goods increasingly get processed and shipped back and forth across borders. At least 3% of U.S. imports - $25 billion - "actually represents the value of domestic products that have been exported and then returned to the U.S." after further work abroad. The domestic content of this trade is especially large with Mexico and Canada.

  "Such production sharing and outsourcing means that it is becoming difficult to determine the true origin of any particular product. For one particular car produced by an American manufacturer, for example, 30 percent of the car's value is due to assembly in Korea, 17.5 percent due to components from Japan, 7.5 percent due to design from Germany, 4 percent due to parts from Taiwan and Singapore, 2.5 percent due to advertising and marketing services from Britain, and 1.5 percent due to data processing in Ireland. In the end, 37 percent of the production value of this American car comes from the United States."

  Barbie dolls have similarly divided provenance. Indeed, a significant percentage of trade is simply the exchange of material between affiliates of a multinational company. (The pricing of these transfers is hardly an exact science - and usually errs against high tax jurisdictions.) These "intrafirm" transactions accounted for 36% of U.S. exports of goods and 43% of U.S. imports of goods in 1994.
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  All of this means that considerable skepticism is justified when evaluating the official figures.
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  Trade growth is driven by decreased costs and increased speed of transport, and declining transaction costs of obtaining information about demand in distant markets or supplies from distant providers. Substantial reductions in government trade restraints have also played a role. Nevertheless, significant barriers to trade remain, and international trade remains far below its potential.
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Public opinion:

 

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  Americans view international trade favorably. Majorities range from 60% to nearly 70% favorable on a variety of trade questions. Even bigger majorities, however, believe that labor and environmental standards should be a part of trade agreements, and the public is evenly divided over "fast track" authority and new initiatives, due to the belief that trade plays a role in increasing inequalities.
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Advantages of trade:

 

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  The theoretical case and empirical data supporting the benefits of free trade - from the time of Adam Smith to the present - are reviewed by Irwin. The benefits from specialization and the division of labor are obvious and enormous. Also important - if not so obvious - are the benefits of "comparative advantage" that assures that all nations can find advantages in international trade even if none of their producers of goods and services are among the most efficient.

"Comparative advantage" assures that all nations can find advantages in international trade even if none of their producers of goods and services are among the most efficient.

 

In addition to direct gains are the indirect gains from the increased productivity of domestic producers and the discipline of import competition imposed on domestic producers with market power.

 

Also, there are the incalculable benefits to consumers of increased variety and quality increases not reflected in economic statistics.

 

 

 

 

 

  "Even if a developing country lacks an absolute productive advantage in any field, it will always have a comparative advantage in the production of some goods. --- Such countries will export goods where their relative disadvantage is least and use those export revenues to improve their standard of living by purchasing other goods from abroad, from fuel to capital equipment to medicine. There is no country whose economic circumstances prevent it from engaging in mutually beneficial trade with other countries."

  By suddenly opening itself to trade in 1858, for example, studies have calculated that Japan had a rapid increase in real income of as much as 65%, Irwin points out. Since almost all nations are today already engaged in international trade, direct gains from planned further trade liberalization would be far less dramatic - less than 2% of GDP for most nations and the world. However, elimination of all remaining trade barriers could as an immediate impact increase U.S. and world GDP around 6%.
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  In addition, however, would be indirect gains from the increased productivity of domestic producers - the calculation of which is inherently imprecise - and also the more evident gains from the pricing discipline imposed on domestic producers by import competition. "Numerous studies confirm --- that trade disciplines domestic firms with market power."
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  Further, Irwin points out the incalculable benefits to consumers of increased variety - something most other economists totally neglect. (FUTURECASTS has frequently emphasized the failure of economists to take factors of variety and quality into account. It is a great pleasure to see Irwin recognize these important factors.) Barriers to trade not only reduce the amount of goods imported, but also reduce the range or variety - since smaller markets don't justify the provision of as great a number of different goods. They would also reduce the availability of specialized producer intermediate and consumer goods.
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  Irwin cites the immediate increase in the variety and quality of fruits and vegetables available in Poland and East Germany after the fall of the Berlin Wall. Affordable bananas and oranges appeared in their markets for the first time, along with apples and cabbages without worms or rot. "The effect of such changes on aggregate output and income was minuscule, but the welfare gains from the availability of new and improved goods was not insignificant."

  "To the extent that economists focus only on trade's effects on production or income, they understate the gains from trade."

The benefits of foreign research and development can be inexpensively acquired by importing pertinent capital goods, intermediate goods, and consumer goods.

 

In one nation after another, the substantial reduction of trade barriers has led to tripling and quadrupling of productivity growth rates.

  By improving productivity, international trade raises standards of living. By increasing competition, it forces out the least productive producers - forces all remaining producers to adopt best practices - and permits the most successful to expand both domestically and internationally. (The introduction in the U.S. of Japanese auto production methods and technology in the 1980s is a prime example.)
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  "To the extent that trade barriers raise the price of imported capital goods, countries are hindering their ability to benefit from technologies that could raise productivity." One study estimates that about 25% of productivity differences between countries is attributable to price differences in capital goods.
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  Sometimes the impacts can be quite dramatic. Irwin points out the spectacular yield increases that have been attributable to import of new crop varieties and farming methods. The benefits of foreign research and development can be inexpensively acquired by importing pertinent capital goods, intermediate goods, and consumer goods.
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  There have been many studies demonstrating the productivity benefits from increased competition. In one nation after another, the substantial reduction of trade barriers has led to tripling and quadrupling of productivity growth rates. In Canada, the U.S.-Canada Free Trade Agreement resulted in an "astoundingly large" increase in productivity of 17% in the industries previously protected by high tariffs, and a 5% average increase for all manufacturing.
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  "These productivity effects were not achieved through scale effects or capital investment, but rather due to a mix of plant turnover and rising technical efficiency within plants. By raising productivity, the [trade agreement] also helped increase the annual earnings of production workers," particularly in the industries previously most protected. Chile, New Zealand and Spain provide prime examples of the benefits of trade liberalization.

  "Free trade contributes to a process by which a country can adopt better technology and expose domestic industries to new competition that forces them to improve their productivity. As a consequence, trade helps raise per capita income and economic well-being more generally."

 While the studies are concededly imprecise, a variety of different studies using a variety of different methods have indicated substantial benefits from international trade. "Almost invariably, more open trade policies are associated with higher per capita income, although the magnitude and significance of the relationship varied considerably."
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The much maligned McDonalds has set standards for clean restrooms and orderly and pleasant service that domestic competitors have been forced to emulate around the world.

  A direct relationship between investment rates and trade has also been demonstrated. Since "the share of investment in GDP is positively correlated with growth in per capita income," there is a relationship between trade and growth in per capita income - as well as with economic growth in general. Irwin points to dramatic increases in economic growth rates in Chile, S. Korea and India after significant reductions in trade barriers.
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  Improvements in a variety of services is also forced by increased competition. Although McDonalds has been much maligned, Irwin points out that it has set standards for clean restrooms and orderly and pleasant service that domestic competitors have been forced to emulate around the world. (This is a fine example of the many "quality" factors that FUTURECASTS has been emphasizing and most economists ignore because they are not reflected in economic statistics.)
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  The contributions of trade to democratization and peace is far more difficult to prove, but an impressive list of nations have moved towards democratization at some time after trade liberalization - (Chile, Taiwan, S. Korea, Mexico) - and democracies seldom fight with each other.

  It may well be that democracy is the only form of government with the flexibility to function appropriately in today's rapidly changing world - but "perfect" forms of democracy are all fatally flawed. The challenge - brilliantly met by the founding fathers of the U.S. Constitution - is to establish a practical form of democracy that includes procedural obstacles to demagogic policies. Democracy is neither easy to establish nor easy to maintain. Lacking sufficient safeguards against irresponsible political behavior, many efforts at establishing democracy - especially in Latin America - have in the past failed. Many currently exhibit serious weaknesses.
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  However, trade and economic development facilitate the growth of the middle class. It is within the middle class, if anywhere, that a broad ethic of civic responsibility and political engagement will develop to provide the foundation for both functional democratic governance and market economics.

There is no connection between trade liberalization and environmental degradation - but there is often a direct relationship between protectionist subsidies and environmental problems.

 

Logging for timber and timber products is just a minor cause of deforestation in tropical countries.

 

All too often, environmental concerns are raised by protectionist forces and ideological opponents of capitalism to kill trade liberalization rather than for any legitimate environmental purpose.

  The greatest environmental disasters, Irwin notes, occurred in the old Soviet Union and its satellites. The most polluted cities are in the undeveloped and developing world. "The burning of the Amazon rain forests is largely motivated by local inhabitants clearing land for their own use, not international trade."

  "Environmental damage results from poor environmental policies, not poor trade policies. Environmental damage results from the inappropriate use of our natural resources in the land, sea, and air. The overuse of these resources is commonly related to the lack of well defined property rights. When property rights are not well established, that is, when no one has ownership rights and control over a resource, then open access to the resource frequently leads to its exploitation beyond the socially optimal level." (What everybody owns, nobody owns! The most widespread environmental problems arise from abuse of the commons.)

  There is no connection between trade liberalization and environmental degradation - but there is often a direct relationship between protectionist subsidies and environmental problems. Subsidized fishing fleets over fish ocean fishery stocks. Agricultural subsidies and trade restraints encourage marginal farming heavily reliant on agrochemicals and intensive animal production practices and overgrazing. "Countries that have a comparative advantage in agriculture, whether they are industrialized, such as Canada and Australia, or developing, such as Argentina and Brazil, do not depend as heavily on fertilizers and pesticides to maintain output."
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  Moreover, logging for timber and timber products is just a minor cause of deforestation in tropical countries, Irwin points out.

  "Almost all the annual logging in developing countries is for domestic production of fuel and charcoal - for the simple reason that [wood] fuel and charcoal are the cheapest source of energy for poor people. About 77 percent of forest timber production in Asia, 70 percent in South America, and 89 percent in Africa is for domestic fuel and charcoal."

  Indeed, blocking the timber trade would immediately reduce the value of the forests, reducing local incentives to properly manage their forest resources. Taxing timber exports to encourage purchase of value added plywood and other mill products in Indonesia results in 15% greater use of timber because of wastage from inefficient Indonesian mills. The inefficiency of local processors is common in these cases.
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  Trade does increase industrial production. However, it also increases prosperity which invariably ultimately leads to domestic demands for better environmental regulations and less pollution. It is growth that does not spread prosperity that invariably increases pollution. Trade restraints notoriously confine prosperity to the politically powerful and favored classes.
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  All too often, environmental concerns are raised by protectionist forces and ideological opponents of capitalism to kill trade liberalization rather than for any legitimate environmental purpose. "Because trade in itself is not a driving force behind pollution, a policy of free trade rarely detracts from such goals, and in many instances may help."
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Costs of trade restraints:

  The costs to U.S. consumers from trade barriers has been calculated at about $32 billion in 1996 - with textile restraints being the most costly. (This does not include the costs to taxpayers of subsidies for agriculture and other producers.) "As of the early 1990s, the United States maintained more than three thousand separate quotas on imports from more than forty nations."
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  Quotas are actually more costly than tariffs, Irwin points out. Tariffs at least provide extra revenues for the government and transfer wealth from domestic consumers to domestic producers. Quotas, on the other hand, increase prices and transfer wealth to the foreign producers that have the quotas. Such "rents" from artificial scarcity in textiles amounts to over $6 billion. Sugar quotas cost about $900 million annually - with $500 million attributable to economic inefficiency and $400 million attributable to quota rents to foreign exporters.
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  Steel antidumping restraints cost about $4 billion - restrictions on maritime shipping $1.3 billion. Restrictions on Canadian lumber raise the cost of new homes by between $800 and $1,300.
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  The allocation of valuable quota rights usually increases corruption in the exporting nations. In the U.S., protection from foreign competition invariably is procured by substantial campaign contributions or outright corruption.
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    The sugar restraints are particularly pernicious, Irwin asserts. A few large producers reap most of the benefits - provide large campaign contributions - cause considerable environmental harm because of the chemicals used on Florida plantations - prevent desperately poor sugar-producing nations from exporting to the U.S. - and force foreign farm workers who otherwise would have worked sugar fields in their own nations to travel to the U.S. plantations to find work. "When a politician intervenes on behalf of an industry, the story is often an ugly one."

  Indeed, the proportion of agricultural subsidies and tariff benefits that go to the small family farmer is now so minuscule that not even the politicians pretend any more that these programs are anything but welfare for the wealthy.

  Theoretical advantages of protectionism are generally dubious, Irwin concludes, and are confined at best to narrow situations demanding constant accurate adjustments to shifting markets well beyond the management capabilities of governments.

  "Research has shown that the case for interventions is substantially weakened when government policy is subject to strategic manipulation by politically active firms. Thus, there are many reasons to be skeptical about whether a government can determine where strategic intervention will be worthwhile among the many industries competing for government assistance, especially in a representative democracy, where trade policy is often driven by the interests of politically active domestic producers."

  Free trade is simpler and requires less active political management. It also avoids the buildup of "concentrated political and economic power, not just to do good but also to make costly mistakes" inherent in interventionist policies.

  There is a pragmatic political argument that - without some protection for powerful vested interests - no nation could ever even proceed towards trade liberalization. In fact, all of the major advanced nations began their participation in the industrial revolution under substantially mercantilist policies. This does not, of course, undermine the view that they might have advanced further and faster under a free trade regimen - if that had been politically possible - which it wasn't. Such political realities unfortunately still apply to the undeveloped nations of today - as well as being still applicable in developed nations.

  Free trade is not a magic bullet, the author prudently cautions. There is a wide array of other good government policies that facilitate domestic profit driven, market directed commerce, that are also essential for prosperity. As examples, he mentions rule of law, protection of property rights, fiscal and monetary discipline, police protection, education, infrastructure, and appropriate foreign relations. However, protectionism causes real harm.

  Although reasonable levels of budgetary and monetary discipline are essential, perfection is fortunately not required in these governance matters - and is far from achieved even in economically prosperous nations.

Effects on employment:

  Trade both destroys and creates jobs. (The exact same thing can be said about competition in domestic trade.) The number of jobs is determined by the number of people in the labor force, the business cycle, and labor market policies - not trade. In fact, between 1994 - when NAFTA was enacted - and 2000, unemployment fell from 6.1%  to 4% - rising thereafter in line with the business cycle rather than due to trade flows.
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  Formulaic efforts to calculate the impacts of trade on jobs are convincingly debunked by Irwin. Such calculations - put forth by a variety of economists - are "bound to rest on implausible and arbitrary assumptions and the predictions are ultimately unverifiable" because of the impossibility of isolating trade influences from the myriad other influences affecting employment.
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  The benefits of trade are not greater employment, but more productive employment that heightens prosperity.

 Nevertheless, a widespread trade war can undermine economic activity and play a substantial role in depressing economic activity and employment. This clearly occurred in the 1930s when trade war restraints made it impossible for highly indebted nations - including many major nations still bearing the financial burdens of WW-I - to earn enough to service their international debts. The destruction of trade in agricultural products was particularly damaging to employment and overall economic activity in the U.S.

Nations that liberalize trade and thus experience sharp increases in imports as a percentage of GDP also automatically enjoy similar sharp increases in exports - and gain the benefits of export diversification in addition. On the other hand, nations like Brazil that continuously restrain imports fail to increase exports despite strenuous efforts.

  Restraints on imports invariably restrain exports. There is a fundamental tie between exports and imports - working through various mechanisms such as monetary exchange rates. Irwin explains how nations that liberalize trade and thus experience sharp increases in imports as a percentage of GDP also automatically enjoy similar sharp increases in exports - and gain the benefits of export diversification in addition. On the other hand, nations like Brazil that continuously restrain imports fail to increase exports despite strenuous efforts.

  "The Smoot-Hawley tariff of 1930, for example, significantly reduced imports but failed to create jobs overall because exports fell almost one-for-one with imports, resulting in employment losses in those industries."

  This inherent connection between exports and imports is called "the Lerner symmetry," after a young economist who first clearly demonstrated the phenomenon.

  Irwin does not mention or analyze the initial apparent success of the export forcing development strategies of Japan and the Asian Tigers.

  Moreover, trade restraints raise the price of intermediate goods, adversely affecting jobs in pertinent industries. The high price of sugar has been estimated to have cost almost 9,000 jobs in food manufacturing and refining - forcing some heavy users of sugar to close down U.S. operations and expand Canadian operations. Periodic trade restraints on electronic components like flat panel displays and computer chips have chased many computer manufacturers out of the country. Steel restraints have a depressing impact on steel users.

  "When a domestic industry asks the government to impose trade barriers that would raise the domestic price above the world price, the choice means trading off jobs in one sector of the economy for jobs in another sector, not creating or losing jobs overall."

  Unfortunately, "those seeking to limit trade tend to be more vocal than those who benefit from open markets.."
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  The contention that a trade deficit costs jobs is also debunked by Irwin. 

  A trade deficit in a floating exchange rate system will not cost jobs, as exchange rate fluctuations will keep the system stable. Of course, chronic declines in the monetary unit adversely alter the terms of trade and reduce relative living standards. If devaluation becomes part of an inflationary process with chronic expansion of monetary aggregates, it can indeed cause job losses by the processes of stagflation or - at its worst - inflationary depression.
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  If fixed exchange rates are being used to reduce inflation fears and interest rate costs, a trade deficit as part of a payments deficit may force the export of gold or hard currency reserves to maintain the currency peg. The ultimate collapse of the peg when reserves run low can indeed throw an economy into turmoil.
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  However, in both of these instances, job losses are dependent on irresponsible monetary expansion induced almost always by lack of budgetary discipline - not on trade.

  The decline in employment in manufacturing during these last three decades has nevertheless been dramatic. While the nominal loss has only been from 19.4 million jobs to 18.5 million, as a percentage of the workforce the decline has been from 27% to 14%. However, real manufacturing output rose 40% in the 1990s alone, "and has declined only slightly as a share of GDP when measured at constant prices." (There is no evidence of the feared "hollowing out" of U.S. industrial capacity.)

  "Growth in productivity has allowed manufacturing to achieve vastly increased output with roughly the same number of workers, or alternatively to maintain its share of constant-dollar GDP with a much smaller share of the workforce. --- On the other hand, the relatively poor performance of the service sector in improving productivity has meant that increasing output there (to keep up with the rapidly growing demand for finance, health care, and education) requires shifting a greater share of the labor force into those occupations."

  The author points out that most of the trade deficit is due to the import of mineral fuels. The deficit in manufacturing is actually very small.

  This kind of argument is dubious at best, since money is fungible no matter what it is spent on. International payments should over time balance across categories, not within categories.

 

 

 

Consumers pay $24 billion annually to protect about 170,000 textile jobs - or about $140,000 per job. The cost is $350,000 per job in protected machine tool manufacturing and $600,000 in sugar.

 

"Real compensation" is determined by productivity and has closely tracked productivity gains for decades. Trade has a substantial positive impact on productivity, and thus is responsible for a substantial fraction of the U.S. increase in average real compensation.

 

The U.S. actually imports very little from low wage nations, so these imports cannot be a major contributor to wage inequality. The major factor has been "the spectacular increase in the labor market return to education," due mainly to technological change.

  Nor are many high wage jobs being lost to import competition. On average, they are low skilled, low wage jobs such as in the apparel industry.

  "This is because wages in industries that compete against imports are well below average, whereas wages in exporting industries are well above average. The United States tends to import labor-intensive products, such as apparel, footwear, leather, and goods assembled from components."

  U.S. exports, however, tend to be "more skill-intensive manufactured products, such as aircraft, construction machinery, engines and turbines, and industrial chemicals."
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  For the U.S., trade restraints thus tend to preserve low skilled low paying jobs and reduce high skilled high paying jobs. The cost of saving jobs is colossal. Consumers pay $24 billion annually to protect about 170,000 textile jobs - or about $140,000 per job. The cost is $350,000 per job in protected machine tool manufacturing and $600,000 in sugar.  

  Of course, the real beneficiaries are the owners and top managers and union leaders of protected industries. The concern for jobs is just a makeweight argument - as are concerns for family farmers, labor standards and most environmental factors.

  Trade restraints can, of course, benefit highly paid unionized workers by sustaining their union wage premiums. This is the case in the auto and steel industries. Trade restraints have NOT been successful in increasing employment in these industries, but has been successful in maintaining the union wage premiums of those employed. The industries, however, remain in chronic difficulty due to world wide overcapacity driven by similar protectionist policies in many other nations.
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  The argument that competition with low wage nations will depress average U.S. compensation levels is convincingly debunked by Irwin. In fact, "real compensation" is determined by productivity and has closely tracked productivity gains for decades. Moreover, trade has a substantial positive impact on productivity, and thus is responsible for a substantial fraction of the U.S. increase in average real compensation.
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  Of course, there are always losers as well as winners even when the averages show a clear net benefit - and the costs to the losers may be concentrated while the benefits are widely spread. However, the growing inequality in the U.S. is due to domestic factors such as growing demand for skilled labor. The U.S. actually imports very little from low wage nations, so these imports cannot be a major contributor to wage inequality. The major factor has been "the spectacular increase in the labor market return to education," due mainly to technological change.
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  "One study found that nearly three-quarters of the overall shift in labor demand (for nonproduction workers) was a change in demand within industries rather than between industries." Indeed, educated workers are enjoying similar gains even in many developing nations.
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Displaced workers:

  Help for workers displaced by imports may be politically essential to reduce opposition to free trade, Irwin concedes. However, it is not always that easy to distinguish between workers displaced by imports and those displaced for other reasons. He asks: "[D]o we need special policies for trade-displaced workers?"
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  Trade is " a small factor in the displacement of labor," compared to domestic influences. Since NAFTA, U.S. employment has risen by more than 10 million. Although monthly employment turnover in the U.S. exceeds 2 million, only about 40,000 per year qualified for cash and training trade adjustment assistance. (The "giant sucking sound" of jobs heading south of the border never occurred.)
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  Irwin provides some interesting statistics and analyses of the new job prospects of trade-displaced workers. While most find similar jobs fairly quickly, they do not have the skills to find jobs in export-oriented industries, and so do not personally benefit from the new employment opportunities of expanded trade. Their earnings losses while unemployed or employed in lower paying jobs are thus sizable and persistent. They will thus likely remain opponents of free trade.
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  Trade adjustment assistance is a minor program - about $300 million in 1997 - that is taken advantage of by only about 20% of eligible workers. As is usual with government training programs, it is a failure. There is no evidence that it improves the employment prospects of trainees. Irwin provides some not always convincing analyses of the program's shortcomings and possible improvements. However, he correctly concludes that "trade policy is inherently political and rarely determined by purely economic considerations."
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Unfair competition:

  Procedures have been established to counter unfair competition subsidized by foreign governments. Countervailing duties in the amount of the subsidy margin can be imposed by these procedures in accordance with international trade agreements.
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Since dumping is judged by comparing any individual price in the U.S. to the average price in the exporters home market, dumping is almost always found, and the dumping margins are inflated.

 

The procedure is so chilling, that imports invariably fall substantially as soon as a complaint is filed, since importers fear becoming liable if the complaint is upheld.

 

Most cases filed actually end in negotiated agreements imposing artificially higher prices.

 

Unsurprisingly, other countries have quickly learned this game, and U.S. exporters are increasingly targeted by antidumping complaints.

 

 

  However, the antidumping law is the preferred remedy against competing imports - also in accordance with international treaty agreements. Dumping is defined as a lower price in the U.S. market than in the domestic market. Import duties may be imposed to offset the difference.
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  Since dumping is judged by comparing any individual price in the U.S. to the average price in the exporters home market, dumping is almost always found, and the dumping margins are inflated. Other methods of calculation frequently used result in even much higher - indeed sometimes ridiculously higher - calculations. The adjudication process by the Commerce Dep't and the U.S. International Trade Commission is highly politicized, and about two thirds of all complaints are confirmed.
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  In 2000, approximately 300 antidumping duty orders were in effect, 41% of which were on iron and steel products. However, only a small amount of imports have in fact been affected by this procedure - just 1.8% in 1991. Indeed, the procedure is so chilling, that imports invariably fall substantially as soon as a complaint is filed, since importers fear becoming liable if the complaint is upheld.
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  The cost, in 1993, has been calculated at $4 billion. "This puts them second only to the Multifiber Arrangement as the most costly of all U.S. import restrictions." The cost can only increase, since these duties stay in place an average of nine years.
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  Moreover, the threat of these duties has undoubtedly led foreign exporters to charge higher prices in U.S. markets than they otherwise would have, and most cases filed actually end in negotiated agreements imposing artificially higher prices.

  "The antidumping process is riddled with subtle tricks and arbitrary biases that invariably favor the domestic petition, making it ironic that they are a part of the 'fair trade' laws."

  A Commerce Dep't. Inspector General found - in 84 steel industry complaints filed in June, 1992 - that the adjudicating agency "adopted several controversial and confusing policies that undermined the principles of transparency and consistency --- [and were] not only inconsistent with past practice, but were also applied inconsistently from one case to the next." The policies applied "made reporting more onerous for respondents, caused confusion among analysts, and made [the] decision appear arbitrary, even to its own staff."
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  Unsurprisingly, other countries have quickly learned this game, and U.S. exporters are increasingly targeted by antidumping complaints.
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The vast majority of cases do not involve foreign exporters with anything near the market power for a successful predatory pricing effort.

  After all, as Irwin points out about price discrimination, "charging different prices in different markets, is a normal business practice and an accepted feature of domestic competition." Only if the action is "predatory" or in some way "anticompetitive" is it harmful. However, the laws are not aimed at such harmful actions. They are thus apparent efforts to protect domestic businesses.
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  "In fact, in the overwhelming majority of [antidumping] cases, such predatory motives can be ruled out as utterly implausible." The vast majority of cases do not involve foreign exporters with anything near the market power for a successful predatory pricing effort. "The antidumping statute is not employed to prevent predatory conduct or preserve competition, but simply to protect the domestic industry from foreign competition - at the expense of domestic consumers, of course." Indeed, the law has been specifically interpreted as intended to protect domestic industry from "material injury" from foreign competition.
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  Irwin thus supports the widespread view that "the antidumping laws are simply a popular means by which domestic firms can stifle foreign competition under the pretense of 'fair trade.'
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The escape clause:

  Temporary nondiscriminatory tariffs are permitted under international agreements - for 4 to 8 years - to provide some relief for domestic industries unable to compete with imports. The standards for use of this remedy are much stiffer than under the antidumping procedures, and so it is seldom used.
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  Justification for this remedy is provided by the practical recognition of political necessity. Most nations would be wary of any trade agreements if they had no power to respond to domestic political pressures. "Some form of safeguards seems to be a political necessity."
 &
  There are apparent success stories. Domestic automobiles, consumer electronics and semiconductors have apparently benefited from temporary import relief and used the time to make competitive adjustments. However, other industries have not adjusted and instead have sought repeated periods of "temporary" protection. Steel has received nearly continuous protection for over three decades, but the largest integrated steel mills remain dependent on protection and continue to lose market share to aggressive domestic mini mills.
 &
  Textiles and apparel, too, have received repeated and tightening protection, and remain under competitive pressure. Under current international agreements, this should end in 2005. The politics of this event should be interesting.
 &
  Irwin also debunks the myth that the Harley-Davidson revival was made possible by temporary protection from import competition.
 &

History and political theory:

  Irwin reviews the political theory and history of trade policy going back to the 1888 election between Grover Cleveland and Benjamin Harrison. There are many reasons for the political bias in favor of  protectionism - the most basic of which is that "the benefits of trade protection are highly concentrated, while the costs are widely diffused."
 &

"The benefits of trade protection are highly concentrated, while the costs are widely diffused."

  Thus, even though sugar import restraints cost consumers almost twice as much as a small handful of large growers gain, the cost is only about $7 per consumer, while some individual growers reap millions. It was thus worth while for sugar producer political action committees to make more than $1.2 million in campaign contributions for the 2000 election campaign.
 &
  It is difficult to determine why some groups succeed in gaining protection or subsidies and others do not, but simple inertia is an obvious factor. Once a protectionist program is initiated, it tends to continue indefinitely.
 &

  Trade policy is controlled by Congress under Article 1, Section 8 of the Constitution. In the past, Congress set trade policy with little Presidential input. (This led to the disastrous trade war of the 1920s, culminating in the 1930 Smoot-Hawley Tariff that played such a major role in driving the Great Depression down and then blocking recovery.) Today, Congress still controls trade policy. However, it grants the President negotiating authority - imposes conditions - rejects or approves the result - and enacts procedures offering domestic industries relief from foreign competition.
 &
  Until WW-II, import-competing interests dominated trade policy, and tariffs were high. Consumers and exporters were disorganized and weak, while import-competing producers were few but intensely interested and organized. However, other nations could play that game, too, and U.S. foreign trade -  exports as well as imports - fell 50% in volume between 1929 and 1933. (The decline in exports was especially severe in agriculture, which was at that time the nation's biggest employer.) Protectionism takes a variety of forms besides tariffs - including import quotas, foreign exchange controls, subsidies, and preferential trading blocks.
 &

The executive branch provided a focus for nationwide export interests whereas Congress had always served to focus on narrow statewide protectionist interests.

 

The trade wars of the 1920s and 1930s began to be recognized as having played a major role in impoverishing and embittering the world and driving nations into the hands of aggressive despots.

  The 1934 Reciprocal Trade Agreement Act, championed by Sec. of State Cordell Hull, brought the first crack in the tariff wall. Although agreements were reached with most of the major trading partners of the U.S. by WW-II, tariff reductions were modest and results were minimal.
 &
  However, the Act did set the precedent of shifting trade policy to the President, so that national and foreign policy interests in expanding trade and nationwide prosperity became predominant. This process "reduced access to legislative mechanisms that supported redistributive bargains and logrolling coalitions that had led to high tariffs." Also, the executive branch provided a focus for nationwide export interests whereas Congress had always served to focus on narrow statewide protectionist interests.
 &
  For the U.S., WW-II inflation (almost 50%) was also a major contributor to trade liberalization, since most tariffs were in nominal dollar amounts rather than percentages, and the lack of import competition during and just after the war meant there was little pressure to raise them.
 &
  As post WW-II trade agreements increased in effectiveness, import-competing sectors shrunk both in size and influence, while export interests expanded both in size and influence. This was due in major part to the major reduction in foreign competition due to the destructive impact of the war - which for many years gave the U.S. a major advantage and a large export surplus. Thus, even Republican Congressmen began to align themselves on the side of trade liberalization.

  Before WW-II, the Republicans were the party of protectionism and were rightly blamed for the policies that brought on the Great Depression. Today, it's the Democrats that are the primary protectionists.

  Finally, the Cold War brought foreign policy considerations to bear. Trade liberalization was seen as a practical way to strengthen allies and support resistance to Communism. The trade wars of the 1920s and 1930s began to be recognized as having played a major role in impoverishing and embittering the world and driving nations into the hands of aggressive despots. Cordell Hull - with a powerful assist from some very harsh history - had won.
 &

GATT:

 

 

&

  The 1947 General Agreement on Tariffs and Trade attempted a multilateral approach to trade liberalization. Trade barriers were significantly reduced, but existing trade preferences - such as those within the British Empire - remained, and great latitude was maintained for nations wishing to maintain trade restrictions. Quantitative restrictions and exchange controls remained in wide use, but discriminatory practices between imports from various nations and between domestic products and imports were banned.
 &

  The treaty successfully reduced trade barriers, established rules governing trade, and created a forum for further negotiations. But efforts to establish an International Trade Organization failed.
 &
  Between 1949 and 1961, additional members joined GATT, and some further minor tariff reductions were accepted. However, establishment of the European Common Market created fears that U.S. exports to Europe would be placed at a disadvantage. This opened the way  to further major trade liberalization agreements in the 1960s.
 &
  Further major cuts were made in the 1970s. With tariffs on manufactured goods now at very low levels, the emphasis shifted to non tariff barriers. Codes dealing with subsidies, technical barriers, import licenses, government procurement, customs valuation, and antidumping procedures were agreed - but not without wide exceptions. Furthermore, these codes were voluntary, and most countries didn't sign them.
 &
  But GATT was an undoubted success. World trade grew faster than world production during this period, playing a major role in spreading prosperity.
 &

"No independent power resides in GATT itself, which essentially relies on the good will of the signatories."

  GATT is self enforcing. Aggrieved nations are authorized to suspend their obligations to offending nations. "No independent power resides in GATT itself, which essentially relies on the good will of the signatories."
 &
  There are many exceptions and loopholes and gaps in coverage - especially for agriculture and developing countries. However, signatory nations have generally complied with the rules, nondiscrimination has been widely accepted, and tariffs substantially reduced. "In addition, overall trade relations have been good, specific disputes have been contained and policies have been stable, providing an environment in which international commerce has flourished."
 &
  The shift of emphasis to negotiations about non tariff barriers brought Congress back into the act. Tariff reductions could be authorized by executive order, but removal of non tariff barriers required legislative actions. In the 1974 Trade Act, Congressional approval of trade agreements was reestablished, but under a "fast track" procedure that avoided the problem of Congressional second guessing that could negate completed negotiations. Congress limited itself to approval or disapproval of trade treaties and implementing legislation as a whole. The GATT agreement in 1979, the U.S.-Canada Free Trade Agreement in 1988, and the North American Free Trade Agreement in 1993 were negotiated under the fast track mechanism.
 &
  By 1999, the average U.S. tariff on dutiable imports had fallen from 54% to 5%; the average tariff on all imports had fallen from 20% to 2%; and, over 60% of imports were duty free.
 &

An expanded antidumping remedy to a large extent placed the authority to impose protectionist restraints into the hands of the private interests seeking protection.

  With Congress back in the act, however, protections from trade injury began to be expanded. In the 1974 Trade Act, the U.S. International Trade Commission was authorized to grant relief in cases where imports were a "substantial cause" of injury. In Section 301 of the Act, the U.S. Trade Representative was authorized to negotiate on behalf of U.S. exporters aggrieved by actions of foreign nations, and the President was authorized to impose retaliatory duties against offending countries that don't reach a satisfactory settlement of trade disputes.

  "Likened to a 'crowbar' used to pry open foreign markets, Section 301 has been controversial because the United States unilaterally judges the policies of other countries under the threat of retaliation. A stronger version of the law, known as 'Super 301,' provides for the identification of 'priority' countries and mandates retaliation if an adequate remedy is not forthcoming."

  Since exporters could use this power to pry open foreign markets, many have lost interest in further trade liberalization - shifting political power again back in favor of protectionist interests. This export procedure faded in importance after 1994, when such disputes came under the jurisdiction of the World Trade Organization. (Section 301 complaints continue to be filed, but a substantial majority are referred to the WTO.)
 &
  The investigation of antidumping cases was shifted in 1979 from the Treasury Dep't to the Commerce Dep't on the correct assumption that Commerce would be more sympathetic to domestic complaints. The antidumping remedy was significantly expanded in 1984 and 1988. These actions to a large extent placed the authority to impose protectionist restraints into the hands of the private interests seeking protection.
 &

Preferential trade agreements:

  Bilateral and regional trade agreements increased in importance in the 1980s. The Caribbean Basin Initiative, agreements with Israel, Canada, Mexico and Jordan have been concluded by the U.S., and a Western Hemisphere agreement is under negotiation. As of 2000, the WTO reported 114 regional trade agreements in effect worldwide.
 &

  Article 23 of GATT permits these agreements, but they are essentially discriminatory. Whether they on balance increase or harm economic welfare is a complex problem that economists have not been able to crack. However, some of these agreements have foreign policy objectives as well as economic objectives.
 &
  As with any preferences, problems arise. Extensive "rule of origin" regulations have been imposed to prevent outside producers from escaping higher tariffs by shipments into the trading block nation with the lowest tariffs. With the low tariff levels now in force in the U.S., such problems are now minimal for the U.S.
 &

The Uruguay Round:

  New types of trade restrictions - such as "voluntary export restraints" - were blossoming in the 1980s in response to GATT. Nevertheless, the Uruguay Round was a major success. Besides extending trade liberalization, it created the World Trade Organization ("WTO") and strengthened the dispute settlement process. Average tariff levels in developed countries were brought down to 3.8% - developing countries to 12.3%.
 &

Developing nations reasonably view labor standards and environmental standard conditions as weapons used to continue to deny their exports access to developed nation markets.

  This round also began to address trade in agricultural goods, textiles and apparel, services, investment, and intellectual property. It attempts the removal of non tariff barriers to agricultural trade, but tariffs and export subsidies remain very high. The next round - the Doha Round - is expected to begin the politically explosive task of reducing them.
 &
  Most favored nation treatment is both the carrot and the stick driving nations towards acceptance of the GATT and WTO agreements. WTO membership was about 140 nations accounting for over 90% of world trade at the time of publication. Another 30 countries were awaiting membership.
 &
  However, developing nations felt that they got a raw deal in the Uruguay Round. They reduced many of their trade restraints in return for reductions in developed nation restraints in agricultural goods, textiles and apparel. The latter reductions have yet to occur. Developing nations reasonably view labor standards and environmental standard conditions as weapons used in developed nations to continue to block their exports (which is undoubtedly the case). They will be far more demanding in the Doha Round.
 &

The WTO:

  Like the GATT, the WTO has virtually no independent power. The member governments still make trade policy and write the rules governing trade. The WTO can't even comment on these policies.
 &

  So, what does it do? Mainly, it provides a forum for discussing trade policy, and assists in the resolution of trade disputes. It has just a small budget and staff - most of whom are translators.

  "The WTO provides the forum for consultations and negotiations on these matters, assists with the interpretation of the legal texts, arranges for  the arbitration of disputes, and conducts fact-finding surveillance reviews of members' policies, but ultimately the accords are intergovernmental agreements. The WTO has no power to force countries to obey the agreements or to comply with its rulings."

  With modest funding and staffing and limited powers, the WTO has the vital mission of keeping the international trading system functioning smoothly.
 &

The strengthening of the dispute settlement process was predominantly a U.S. initiative - pushed predominantly by Congress.

  The dispute settlement process formalizes and strengthens the process previously developed in an ad hoc manner under GATT. As before, if initial informal efforts to resolve a dispute fail, a panel of experts is convened to arbitrate a dispute, interpret GATT rules and issue a finding as to whether the trade measures in question conform to GATT rules. However, under WTO procedures, there are specific time tables and no nation is permitted to block either the formation of the panel or the adoption of a panel report. An appeal on questions of law and legal interpretation is available.
 &
  Most of the time, nations made serious efforts to resolve their GATT disputes, but the WTO is a definite improvement. Irwin emphasizes that the strengthening of the dispute settlement process was predominantly a U.S. initiative - pushed predominantly by Congress. If a violation is established, "the panel suggests that the disputed policy be brought into conformity with the rules, but generally leaves to the parties themselves the task of working out a solution."

  As the GAO pointed out in GAO: B-285799, Aug., 2000: "WTO dispute settlement is central to U.S. efforts to monitor and enforce trade agreements -- a major focus of U.S. trade policy."

The WTO cannot force any changes. However, the threat of retaliatory action by complaining nations and the threat to reputation have proven to be  potent - even if far from perfect - remedies.

  The remedies thus remain self enforcing. All member nations, including the U.S., retain complete control over their policies. The WTO cannot force any changes. However, the threat of retaliatory action by complaining nations and the threat to reputation have proven to be  potent - even if far from perfect - remedies.
 &
  The violator can suitably bring the offending practices into conformity, or can negotiate other compensation - usually lower tariffs on other goods exported from the complaining country. If negotiations fail, the complaining country can seek authorization to "suspend the application to the Member concerned" of GATT agreement concessions or other obligations.
 &
  In practice, most disputes have been settled, making retaliation an infrequent remedy.

  This is because "retaliation" hurts the retaliator as well as the offender - thus doubling the economic harm done by the original offense, but putting mutual pressure on the parties to resolve the conflict.

  A General Accounting Office ('GAO") evaluation of the first five years of the WTO dispute resolution process - with the U.S. winning some and losing some - concluded that most dispute resolutions were beneficial and that "none of the changes the United States has made in response to WTO disputes have had major policy or commercial impact to date, though stakes in several were important."
 &
  While outside interests are permitted to file amicus (friends of court) briefs in WTO proceedings, the WTO agreements remain strictly government-to-government and designed to deal with government policy. Because "they are not parties to the negotiated agreements," private interests must proceed through their member governments. Although the U.S. has advocated making WTO proceedings more open and transparent, other members have strongly resisted. Such a change cannot be forced on any opposing member.
 &

Environmental conditions:

  The question of whether WTO rules take precedence over domestic environmental, health and safety regulations has been especially contentious. Organizations like Ralph Nader's Global Trade Watch charge that "in the WTO forum, global commerce takes precedence over everything - democracy, public health, equity, the environment, food safety and more."
 &

Most of the few WTO disputes dealing with environmental or health issues merely reviewed whether regulations were implemented in a discriminatory manner.

  Irwin charges that this is a considerable exaggeration. The GAO examination of this issue concluded that "WTO rulings to date against U.S. environmental measures have not weakened U.S. environmental protections." Indeed, as of 1999, fewer than 10 of the more than 140 WTO disputes dealt with environmental or health issues. Of these, most merely reviewed whether regulations were being implemented in a discriminatory manner.
 &
  Article 20 of GATT specifically permits environmental and safety regulations that might restrict trade - as long as they are applied equally to domestic commerce, are necessary to achieve the stated objective, and aren't disguised restrictions on imports.
 &

The WTO specifically approved reformulated gas requirements - but not the discriminatory application.

  In the Reformulated Gas case - which Nader's Global Trade Watch points to as an example of the WTO threat to national environmental standards and sovereignty - the ruling was merely that the U.S. must apply its regulations in a nondiscriminatory way. Nondiscrimination is a policy the U.S. strongly supports as clearly in its best interests.

  "The EPA was free to demand any standard of cleanliness it chose, but was obligated under Article 20 to apply the same standard to domestic and foreign producers."

  Indeed, in testimony before Congress, an EPA administrator admitted that the more stringent application of the rule to imports was intentional - a deliberate discrimination - in an effort to help domestic refiners. The WTO specifically approved reformulated gas requirements - but not the discriminatory application.
 &
  Irwin stresses that the WTO did not force the EPA to either increase or decrease its gasoline standards - it just had to apply the same standard to both domestic and imported gasoline. Also, the amounts of gasoline affected by this ruling was tiny, since 96.3% of the gasoline used in the U.S. comes from domestic suppliers, and the Virgin Islands provides the largest share of the imports. In this case, the Nader organization "put itself in the position of defending a rule that worked to the advantage of the domestic petroleum industry," one of the most powerful special interest groups.
 &

  In the Tuna-Dolphin case, the WTO ruled against U.S. efforts to ban the import of tuna caught with purse seine fishing nets or other means that also sweep up many dolphins. Tuna fishing nations resented this unilateral effort to dictate extraterritorially their domestic production methods. The dolphins were neither U.S. domestic resources nor endangered species, and the U.S. was not authorized by GATT to dictate production methods extraterritorially.

  Ironically, many of the groups and people defending U.S. unilateralism in this and similar trade cases are among the fiercest critics of current unilateralist U.S. policies in other international matters.

  Actually, this dispute took place and was resolved several years prior to the initiation of the WTO. It was rendered moot by an international treaty under which the nine major tuna fishing nations agreed to dolphin-safe production methods. Instead of attempting to dictate to other nations by a U.S. import ban, the U.S. negotiated an international treaty which proved far more effective than the unilateral effort.
 &

The WTO ruled that the shrimp measure was justified under GATT "relating to the conservation of exhaustible natural resources," but that it had been implemented in a discriminatory manner favoring Western Hemisphere producers.

  In the Shrimp-Turtle case, a similar production methods dispute did take place under WTO procedures. The U.S. tried to force foreign shrimp trawlers to use turtle excluder devices by banning shrimp imports that were not produced in a turtle-safe manner.
 &
  The turtles were endangered species. As in the gasoline case, "this WTO ruling did not concern the law itself but rather the way in which the United States implemented the law." The WTO ruled that the shrimp measure was justified under GATT "relating to the conservation of exhaustible natural resources," but that it had been implemented in a discriminatory manner favoring Western Hemisphere producers.

  "The WTO did not require the United States to lift its ban on shrimp imports, but only to implement the ban in a nondiscriminatory way. The import ban was not lifted at any point during the dispute process."

  The U.S. and the complaining South East Asian and Indian Ocean nations have since negotiated treaties for nondiscriminatory application of the ban. Nonetheless, this case remains controversial because the original WTO panel ruled that the pertinent environmental rules violated GATT, and the appellate body overrule of the decision seemed to some as due to outside pressure.
 &
  However, nondiscriminatory implementation of environmental rules have been upheld in other cases - both before and under the WTO. For example, U.S. "corporate average fuel economy (CAFE) standards" have been upheld, as was a French ban on asbestos imports.
 &

The product-process issue:

  Restraints based on the methods of production remain controversial. Many undeveloped nations fear that anti-process regulations based on environmental and labor standards will be set beyond their means of compliance and used to block their exports. This will be one of the more difficult issues raised in future negotiations.
 &

  Unilateral bans based on methods of production are not only resented, they are ineffective, since the banned product simply goes elsewhere to be replaced by product produced by acceptable means. Both tuna and shrimp are fungible commodities. The proper and effective approach in these cases is through negotiated treaties.
 &
  Indeed, instead of spending millions on legal fees, the author points out that it would have been much better to simply buy the inexpensive dolphin-safe nets and turtle excluder devices and donate them to the pertinent fishing fleets of poor nations.
 &

Illegal trade:

 

 

 

 

&

  Of courses, not all trade restraints are bad. Nations are still free to agree to appropriate trade restraint treaties. From the fight against the slave trade in the 19th century to the modern ban on chlorofluorocarbons, such treaties have their place. But some may be bad policy.
 &
  Irwin convincingly asserts that the ban on ivory trade and - less convincingly - the ban on trade in toxic waste may be proving counterproductive. The real problem is in lax enforcement of existing rules. The reduction in economic incentives may be seriously undermining the purposes of the bans. If some ivory can be taken from large elephant herds, those herds will be valuable and more likely to be cared for.
 &

Health and safety regulations:

  The beef hormones case demonstrates the difficulty of distinguishing appropriate health and safety restraints from regulatory protectionism. Europe's restrictions on beef from cattle fattened with the use of synthetic hormones affected over $100 million in U.S. exports. There is no question of discrimination, since the restrictions were applied uniformly to both domestic and imported beef.
 &

Europe did not extent the ban to pork products - which are produced at competitive prices in Europe whereas European cattle are not competitive.

  The science on the subject uniformly found no evidence that the use of these hormones was unsafe. Far greater levels of the hormone are found naturally in such products as eggs, cabbage, broccoli and soybean oil. Furthermore, Europe did not extent the ban to pork products - which are produced at competitive prices in Europe whereas European cattle are not competitive.
 &
  The dispute did have some positive effects. An agreement clarifying the application of health and safety regulations was included in the Uruguay Round. As a result, an 83 year old ban on Mexican avocadoes was lifted and an 80 year old ban on uncooked Argentine beef was lifted from Argentine regions free of hoof and mouth disease. Japan removed a 46 year old ban on U.S. tomatoes, New Zealand lifted a ban on Canadian salmon, and Australia lifted a ban on cooked poultry meat.
 &
  However, disputes over beef hormones and genetically modified foods - also banned in Europe - defy easy resolution. Nor does the WTO have the power to force a resolution. Such contentious issues remain subject to ordinary political and diplomatic negotiations.

  Health care, after all, is a practical art - not a science. For all the scientific tools available, the delivery of health care is still a clinical art. After all, the use of paints and brushes produced scientifically by Dupont does not change the painter into a scientist. Absence of scientific proof of harm is not scientific proof of harmlessness - which is probably impossible to provide.

Labor standards:

 

 

&

  Low wages reflect low labor productivity, Irwin points out. There is a strong relationship between labor costs per worker and value added per worker in manufacturing.

  "Since average wages reflect average productivity, the cost advantage of low wages is generally offset by the cost disadvantage of low productivity. This implies that unit labor costs are roughly comparable across countries."

Undeveloped nations export goods from unskilled labor-intensive industries because those are the only industries they have.

  Thus, there has been no "giant sucking sound" of U.S. jobs flowing to Mexico - or India or other undeveloped nations, although some industry reshuffling does occur in the ordinary course of economic fluctuations. Multinational corporations have found that "you get what you pay for: low wages imply a less productive workforce."
 &
  Even competition in unskilled labor-intensive activities is not clearly in favor of the low wage nations. Productivity can also be impacted by lack of infrastructure, poor political governance of the economy, and other weaknesses in the economic environment. Even as worker productivity rises over time in poor nations, the advantage is offset by rising wages. Irwin shows that such nations as S. Korea, the Philippines - and the U.S.  - all show close correlation between productivity and wages. (This has also been particularly observable in Japan since WW-II.)
 &
  Thus, the OECD has reached a conclusion similar to other economic analysts that "core labor standards do not play a significant role in shaping trade performance." Undeveloped nations export goods from unskilled labor-intensive industries because those are the only industries they have. However, they have not demonstrated any ability to gain market share even in those industries.
 &

 The very low turnover rates - "quit" rates - in multinational facilities is convincing proof that these facilities are in fact substantial improvements on the employment alternatives in undeveloped nations.

  Objections on humanitarian grounds to the low wages and 'sweatshop" conditions in undeveloped nations has led some multinationals to make improvements, but this has had little overall impact on conditions in these nations. Only economic development can provide the higher productivity that will broadly improve labor conditions - and foreign trade and investment are important components of such development. Irwin points to the very low turnover rates - "quit" rates - in multinational facilities as convincing proof that these facilities are in fact substantial improvements on the employment alternatives in undeveloped nations.

  "Efforts to stop exports from low-wage countries, to prevent investment there by multinationals, or to impose high minimum wages or benefits beyond the productivity level of the domestic workforce will simply diminish the demand for labor in those countries and take away one of the few opportunities that workers have to better themselves and their families. Opponents of sweatshops have failed to consider what alternative opportunities for employment can be created."

You can't increase labor standards in poor nations by excluding their exports - you can only do that by accepting their exports.

  Just as trade policy is an inefficient instrument for environmental objectives - it is an inefficient instrument for raising labor standards. Irwin convincingly stresses that you can't increase labor standards in poor nations by excluding their exports - you can only do that by accepting their exports.
 &
  Again - undeveloped nations view labor standard conditionality as just a means to restrict their exports. (To a large extent, this is undoubtedly true.)
 &

Since only about 5% of working children are employed in export sectors, a ban would just shift them to other sectors where pay and conditions would be worse - or leave them to starve without support.

 

The most effective instrument against child labor is economic development. "Child labor virtually disappears once a country's per capita income reaches $5,000."

  There are manifold problems in defining labor standards. Irwin notes that the U.S. has rejected a standard on employment discrimination based on sex or religion for fear this will undermine affirmative action policies. It has rejected a standard on union rights because it has been interpreted as prohibiting the hiring of replacement workers during a strike.
 &
  For poor countries - where only workers in the public sector and in a meager organized manufacturing sector might unionize - union rights are viewed as promoting the rights of a small elite group of workers at the expense of the many. (This is true of all monopoly power - whether  management, labor or government.) 
 &
  Except for banning slavery and prostitution, there is little agreement on what work is suitable for children at various ages. Since only about 5% of working children are employed in export sectors, a ban would just shift them to other sectors where pay and conditions would be worse - or leave them to starve without support.
 &
  Indeed, a study in Bangladesh came to just this conclusion about the 30,000 children removed from textile jobs as a result of human rights policies of American retailers. About 80% of them now work in primary ("stoop labor") agricultural occupations. (What a great victory for the antitrade left!)
 &
  Since the incidence of child labor is strongly related to GDP, the most effective instrument against child labor is economic development. "Child labor virtually disappears once a country's per capita income reaches $5,000."
 &

  The International Labor Organization is obviously the appropriate body for dealing with international labor standards, Irwin contends. It has more appropriate enforcement procedures - which are open to NGO and private as well as government participation. The WTO has neither the expertise nor an effective instrument for dealing with labor standards problems, since trade sanctions are a blunt instrument that hurts the people they ostensibly are intended to help.

  "The effort to push labor standards onto the WTO's lap would undermine the ILO as well as burden the WTO with something it is not well equipped to handle."

  It is apparent that labor unions stand opposed to most measures that would increase trade with undeveloped nations. They favor attaching all manner of  labor and environmental conditions to trade agreements - not because of the merits of the conditions but just as makeweights.

  "Experience has shown that it is all too easy to mask an antitrade agenda with labor and environmental concerns. This is evident in many positions of anticommercial NGOs and anti-import labor unions."

Benefits of reciprocal agreements:

  The case for free trade is unilateral. As Irwin points out, nations benefit from both exports and imports. The imposition of import restraints is the economic equivalent of shooting yourself in the foot.
 &

  However, reciprocity is politically practical, because it creates a powerful interest group of exporters to counter protectionist influence. Obviously, there are gains from exports as well as imports. Both are win-win activities. Thus, much rides on the continued success of trade liberalizing treaty negotiations.

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Copyright 2002 Dan Blatt